The International Journal Of Engineering And Science (IJES)

|| Volume || 3 || Issue || 4 || Pages || 01-12 || 2014 ||

ISSN (e): 2319 1813 ISSN (p): 2319 1805

Modelling the Nigerian Stock Market (Shares) Evidence from

Time Series Analysis
1

A. B, Abdullahi, 2H. R. Bakari

1. Federal Polytechnic Mubi, Department of Mathematics and Statistics

2. University of Maiduguri, Department of Mathematics and Statistics

-------------------------------------------------------------ABSTRACT--------------------------------------------------This study was undertaken to examine the trend or pattern in the Nigeria capital market, as well as to determine
a suitable model for forecasting the Nigerian stock market by applying the techniques of the Box-Jenkins
ARIMA model. The augmented dickey-fuller test (ADF) was employed to test the presence of a unit root
(stationary or non stationary). The test shows that the stock market data are non stationary, after which it was
differenced once to obtain stationary. The results showed that the trend or pattern of the Nigerian stock market
is better represented by exponential model (that is, non-linear relationship exists between the operators and the
general public). Among the series of ARIMA models tested, it was discovered that ARIMA (2, 1, 2) model
performs best since it has a minimum MAPE and MAE compared with the other models. The study further
revealed information as very important to capital market development. It was therefore recommended that the
operators of the Nigerian stock market should relaxed the bottle necks and stringent laws on stock practices so
that more people will be attracted to take part. The operators of the stock market should raise the level of
awareness so that investors will keep abreast with new innovations and what is happening in the market.

KEYWORDS: Arima, Augmented Dickey-Fuller test, Box- Jenkins, Modelling, Shares, Stock Market
--------------------------------------------------------------------------------------------------------------------------------------Date of Submission: 15 April 2014
Date of Publication: 30 April 2014
---------------------------------------------------------------------------------------------------------------------------------------

I.

INTRODUCTION

The ability to predict the stock price to meet the fundamental objectives of investors and operators of
stock market for gaining more benefits cannot be overemphasised. This issue has attracted the attentions of
researchers and statisticians the world over. Stock markets are influenced by numerous factors and this has
created a high controversy in this field. Many methods and approaches for formulating forecasting models are
available in the literature. This study exclusively deals with time series forecasting model, in particular, the Auto
Regressive Integrated Moving Average (ARIMA) models. These models were described by Box-Jenkins.
The Box-Jenkins approach possesses many appealing and attractive features. It allows the manager
who has only data on past years quantities, stock (shares) as an example, to forecast future once without having
to search for other related time series data, for example, shares. Box-Jenkins approach also allows for the use of
several time series, for example stock, to explain the behaviour of another series, for example dividend, if these
other time series data are corrected with a variable of interest and if there appears to be some cause for this
correlation.
Box-Jenkins (ARIMA) modelling has been successfully applied in various stock markets activities. The
following are examples where time series analysis and forecasting are effective: stock market and its related
activities, econometrics analysis, price indices, etc.
As economies develop, more funds are needed to meet the rapid expansion. Consequently, people are
moved to source for funds to meet up with numerous competing challenges. The stock market serves as a
veritable tool in the mobilisation and allocation of saving among competing uses which are critical to the growth
and efficiency of the economy (Alile, 1984). The growing importance of stock market in developing countries
around the world over the last few decades has shifted the focus of researchers to explore efficient ways of
predicting stock market activities to enhance the benefit derived from them. While numerous scientific attempts
have been made, no method has been discovered to accurately predict price movement.

www.theijes.com

The IJES

Page 1

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
Recently, forecasting stock market return is gaining more attention, maybe because of the fact that if the direction
of the market is successfully predicted; the investors may be better guided to participate in stock market and its related
activities efficiently. The profitability of investing and trading in the stock to a large extent depends on the predictability. If
any system be developed which can consistently predict the market, would make the owner of the system wealthy. Moreover
the predicted trends of the market will help the regulators of the market in making corrective measures (Alile 1996).
Financial forecasting or specifically stock prediction is one of the hottest fields of research lately due to its
commercial application owing to the high stakes and the kinds of attractive benefits that it has to offer (Habibullah, 1999).
Forecasting the price movement in stock market has been a major challenge for common investors, businesses, stock brokers
and speculators. As more and more money is being invested, the investors get anxious of the future trends of the stock price
in the market. The primary area of concern is to determine the appropriate time to buy, hold or sell. In their quest to forecast,
the investors assume that the future trends in the stock market are based at least in part on present events and data. Anyway,
this could be so but not always true. However, financial time series is one of the most noisiest and non stationary signa ls
present and hence very difficult to forecast or predict (Okereke, 2000).

Financial time series has high volatility and the time series changes with time. In addition, stock
markets movements are affected by many macro-economic factors such as political events firms policies,
general economic conditions, investors choices, movement of other stock market, psychology of investors etc.
nevertheless, there has been a lot of researches in the field of stock market prediction across the globe on
numerous stock market exchanges; still it remains to be a big question whether stock market can really be
predicted and the numerous challenges that exist in its everyday application on the stock floor by the
institutional investors to maximize profits or returns (Nyong, 1997).
Another motivation for research in this field is that it possesses many theoretical and experimental
challenges. The most important of these is the Efficient Market Hypotheses (EMH) ( Eugene, 1970). This
hypothesis says that in an efficient market, stock market prices fully reflect available information about the
market and its constituents and thus any opportunity of earning excess profit ceases to exist. So it is ascertain
that the system is expected to outperform the market predictably and consistently. Hence, modelling any stock
market under the assumption of EMH is only possible on the speculative, stochastic component not on the
changes in value or other fundamental factors (Pan Heping, 2004). Another related theory to EMH is the random
walk theory (RWT), which states that all future prices do not follow any trend or pattern and are random
departure from the previous prices.
Many researchers and practitioners have proposed many models using various fundamental, technical
and analytical techniques to give a more or less exact prediction. Fundamental analysis involves the in-depth
analysis of the changes of the stock price in terms of exogenous macroeconomic variables. It assumes that the
share price of a stock depends on its intrinsic value and the expected return of the investors. But this expected
return is subjected to change as new information pertaining to the stock is available in the market which in turn
changes the share price. Moreover, the analysis of the economic factors is quite subjective as the interpretation
totally lies on the intellectuality of the analyst. Alternatively, technical analysis centres on using price, volume,
and open interest statistical charts to predict future stock movements. The premise behind technical analysis is
that all of the internal and external factors that affect a market at any given point of time are already factored
into that markets price (Louis, B. Mendelsohn, 2000). Specifically, technical analysts attempt to extract trends
in market using past stock prices and volume information. These trends give insight into the direction taken by
the stock prices which help in prediction. Technical analysts believe that there are recurring patterns in the
market behaviour which can be identified and predicted. In the process they use number of statistical parameters
called Technical indicators chanting charting patterns from historical data.
Apart from these commonly used methods of prediction, some traditional time series forecasting tools
are also used for same. In time series forecasting, the past data of the prediction variable is analysed and
modelled to capture the pattern of the historic changes in the variable. These models are then used to forecast
the future prices. There are mainly two approaches of time series modelling and forecasting: linear approach and
nonlinear approach. Mostly used linear methods are moving average, exponential smoothing, time series
regression etc. one of the most common and popular linear method is the Autoregressive Integrated Moving
Average (ARIMA) model (Box and Jenkins, 1976). It presumes linear model but is quite flexible as it can
represent different types of time series; i.e. Autoregressive (AR), Moving Average (MA) and combined AR and
MA (ARIMA) series.
However, there is not much evidence that the stock market returns are perfectly linear for the very
reason that the residual variance between the predicted return and the actual is quite high. The existence of the
non linearity of the financial market is propounded by many researchers and financial analysts (Abhyankar et al,
1997). Some parametric nonlinear models such as Autoregressive conditional Heteroskedasticity (ARCH) and
General Autoregressive conditional Heteroskedasticity (GARCH) have been used for financial forecasting. But
most of the nonlinear statistical techniques require that the nonlinear model must be specified before the
estimation of the parameters is done.

www.theijes.com

The IJES

Page 2

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
A brief history of the Nigerian stock market
The Nigeria stock market was established in 1961(formally called the Lagos stock exchange). It
became the Nigeria stock market in 1997 with few branches opened in different parts of the country. As at the
end of 1999, there were six branches at Kano, Kaduna, Ibadan, porthartcourt, Onitsha and Lagos, which also
serves as the head office of the exchange. The Nigeria stock exchange is the pivot or the fulcrum around which
the entire capital market rotates. It is the market for the sales purchase of the securities, stocks and shares, a
market in which those individuals, institutions and Government who have funds surplus to their immediate
requirements can employ them profitably. Its major significance is that it is the machinery for the mobilization
of the countrys resources for economic growth and development. Since its establishment in 1961, a major local
investment outlet has been provided for Nigerian investors.
The stock exchange creates a market place where companies can raise capital often referred to as primary
market. At this market, shares are issued for the first time to the public, and shareholders can trade in shares of
listed companies, that is, secondary market. At this market, shares holders as well as new investors can buy and
sell existing shares.
Materials and methodology
Time series is a sequence of observation of a random variable. Hence it is a stochastic process.
Examples include the monthly demand for a product, the annual freshman enrolment in a department of a
university, and the daily volume of flows in a river etc. forecasting time series data is an important component
of operation research because these data often provide the foundation for decision models.
Forecasting is the process of estimation in unknown situations from the historical data. Time series
methods use historical data as the basis for estimating future outcomes, i.e. given x t, xt-1, xt-2 ., called time
series, predicts xt+1. The methods are:
1.1 Autoregressive (AR).
Definition (1.1) An Autoregressive (AR) Model of order p, or an AR (p) model, satisfies the equation:
Xn = / +n + k Xn-1
= / +n 1 Xn-1 + 2 Xn-2 + + p X n-p .(1.1)
For n 0, where [ n ] n 0 is a series of independent, identically distributed (iid) random variables, and is
some constant. The p denotes the order of autoregressive model, defining how many previous values the current
value is related to. The model is called autoregressive because the series is regressed on to past values of itself.
The error term [ n ] in equation (1.1) refers to the noise in the time series. Above, the errors were said to be iid.
Commonly, they are also assumed to have a normal distribution with mean zero and variance 2. For the model
in equation (1.1) to be of use in practice, the estimator must be able to estimate the value of k and /. Notice the
subscripts are defined so that the first value of the series to appear on the left of the equation is always one.
1.2 Moving Average (MA) Models.
Definition (1.2) a moving Average (MA) model of order q, or an MA (q) model is of the form:
Xn = / +n +1 n-1 +2 n-2 + + q n-q ..(1.2)
= / + n + k n-k .(1.3)
For n 1 where 1 q are real numbers and / is a constant.
AR models imply the time series signal can be expressed as a linear function of previous values on the
time series. The error (or noise) term in the equation, n , is the one-step ahead forecasting error. In contrast, MA
models imply the signal can be expressed as a function of previous forecasting errors. It suggests MA models
make forecast based on the errors made in the past, and so one can learn from the errors made in the past to
improve later forecast. (It means it learns from its own mistake).
1.4 Autoregressive Moving Average (ARMA) models.
The best model is the simplest model that captures the important features of the data. Sometimes,
however, neither a simple AR model nor simple MA model exists. In these cases, a combination of AR and MA
models will almost produce a simple model. These models are called Autoregressive Moving Average models,
or ARMA models. Once again p is used for the number of autoregressive components, and q is for the number
of moving average components.

www.theijes.com

The IJES

Page 3

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
Definition (1.3) the form of an ARMA (p, q) model is the equation:
X n - k X n-k = / + n + j n-j , n 0 (1.4).
Where [X n]n 1 , / is some constant, and the k, j are defined as for AR and MA models respectively.
1.5 Autoregressive Integrated Moving Average (ARIMA) models.
In statistics, ARIMA models, sometimes called Box Jenkins models after the iterative Box Jenkins
methodology usually used to estimate them, are typically applied to time series data for forecasting.
Given a time series of data X t-1, Xt-2, X2, X1, the ARIMA model is a tool for understanding and,
perhaps, predicting future values in the series. The model consists of three parts: an Autoregressive (AR) part, a
moving Average (MA) part and the differencing part. The model is usually then referred to as the ARIMA (p, d,
p ) model where p is the order of the Autoregressive part, d is the order of differencing and q is the order of the
moving Average part. For example, a model as ARIMA (1, 1, 1) means that this contains 1 Autoregressive (p)
parameter and 1 moving Average (q) parameter for the time series data after it was differenced once to attain
stationary.
If d = 0, the model becomes ARMA, which is linear stationary model. ARIMA (i.e., d 0) is a linear non
stationary model. If the underlying time series is non-stationary, taking the difference of the series with itself d
times makes it stationary, and then ARMA is applied onto the differenced part.
1.6 Forecasting using ARIMA models.
Forecasting X t from Xt-1, Xt-2, X2, X1, using ARIMA model consists of the following steps. The main
stages in setting up a forecasting ARIMA model includes Model identification, model parameter estimation,
diagnostic checking for the identified model appropriateness for modelling and forecasting. Model identification
is the first step of this process. The data would be examined to check for the most appropriate class of ARIMA
processes through selecting the order of the consecutive and seasonal differencing required in making the series
stationary, as well as specifying the order of the regular and seasonal Autoregressive and Moving Average
polynomials necessary to adequately represent the time series model. The Autocorrelation function (ACF) and
the Partial Autocorrelation function (PACF) are the most important elements of the time series analysis and
forecasting. The ACF measure the amount of linear dependence between observations in a time series that are
separated by a lag k. the PACF plots helps to determine how many Autoregressive terms are necessary to reveal
one or more of the following characteristics: time lags where high correlations appear, seasonality of the series,
trend either in the mean level or in the variance of the series.
1.7 Measures of forecasting accuracy.
The forecast error is the difference between the actual value and the forecast value for the
corresponding period. Et = At Ft where E is the forecast error at period t, A is the actual value at period t and F
is the forecast for period t.
Measures of aggregate error are as shown in figure 1.1
Mean absolute error (MAE)
Mean absolute percentage error (MAPE)
Percent Mean Absolute error Deviation (PMAD)
Mean squared Error (MES)
Root Mean squared Error (RMSE)

MAE = Et / N
MAPE =Et/ AT /N
PMAD = ET / AT
MSE = ET2 /N
RMSE = ET2 /N

Figure 1.1: Error measures of forecasting accuracy.

Out of these MAPE and MAE are the commonly used once. MAPE and MAE are related with how
close are the forecasted values to the target ones. Lower the MAPE and MAE values, better is the forecaster.
But they deal only with the absolute difference between the forecasted values and the target values.
Differencing and unit roots
In the full class of ARIMA (p, d, q) models, the I stands for integrated. The idea is that one might
have a model whose terms are the partial sums up to time t, of some ARIMA model, for example, take the
moving Average model of order 1, W (t j) = e(j) -.8e(j-1). Now if Y(t) is the partial sum up to time t of W(j), it
is then easy to see that Y(1) = W(1) = e(1) -.8e(0), Y(2) =W(1) + W(2) = e(2)+.2e(1) - .8e(0), and in general:

www.theijes.com

The IJES

Page 4

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
Y(t) = W(1) + W(2) + . . . + W(t) = e(t) + .2[e(t-1) +e(t-2) + . . . +e(1)] -.8e(0). Thus Y consists of accumulated
past shocks, that is, shocks to the system have a permanent effect. Note also that the variance of Y(t) increases
without bound as time passes. A series in which the variance and mean are constant and the covariance between
Y(t) and Y(s) is a function only of the time difference [t s] is called a stationary series. Clearly these integrated
series are non stationary.
Another way to approach this issue is through the model. Again lets consider an autoregressive order 1 model:
Y(t) - =P{ Y(t-1) -} + e(t). Now if p < 1, then one can substitute the time t-1 value:
Y (t-1) - = P [Y (t-2) - ] +e(t-1)
To get: Y(t) - = e(t) + P e(t-1) + P2 [Y(t-1) -]
And with further back substitution arrive at Y(t) - = e(t) + Pie(t-1), which is convergent expression satisfying
the stationary conditions. However, if P =1 the infinite sum does not converge so one requires a starting value,
say Y (0) =, in which case:
Y(t) = + e(t) +

t 1
i 1

e(t-1) that is, Y is just the initial value plus an un weighted sum of es or shocks as

statisticians tend to call them. These shocks then are permanent. Notice that the variance of Y(t) is t times the
variance of the shocks, that is, the variance of Y grows without bound over time. As a result there is no tendency
of the series to return to any particular value and the use of as a symbol for the starting value is perhaps a poor
choice of symbols in that this does not really represent a mean of any sort.
The series just discussed is called a random walk. Many stock series are believed to follow this or some
closely related model. The failure of forecasts to return to mean in such a model implies that the best forecast of
the future is just todays value and hence the strategy of buying low and selling high is pretty much eliminated
in such a model since we do not really know if we are high or low when there is no mean to judge against.
Any autoregressive model like Y(t) = 1 Y(t-1) + 2 Y(t-2) + e(t) has associated with it a
characteristic equation whose roots determine the stationary or non stationary of the series. The characteristic
equation is computed from the autoregressive coefficients, for example:
m2 - 1 m - 2 = 0 which becomes, given that 1 = 1.2 and 2 = 0.32
m2 1.2m + 0.32 = (m - .8) (m - .4) = 0
Or m2 1.2m + 0.2 i.e. 1 = 1.2 and 2 = 0.2, becomes (m -1) (m - .2).
In our two examples, the first example has roots less than 1 in magnitude while the second has a unit root, m =1.
Note that:
Y (t) Y (t -1) = - (1 - 1 - 2 ) Y (t - 1) + 2 Y (t 1) Y (t -2) + e (t).
So that the negative of the coefficient of Y (t 1) in the ADF regression is the characteristic polynomial
evaluated at m =1 and will be zero in the presence of a unit root. Hence the name unit root test.
Results and discussions

II.

TREND ANALYSIS

Different trend equations, that is, linear, quadratic, exponential and s-curve were considered. Three
error measures, that is, mean Absolute Percentage error (MAPE), Mean Absolute Deviation, (MAD) and Mean
Significant Difference (MSD) were used to choose an appropriate trend for Nigeria stock exchange. An equation
with minimum MAPE and MAD is considered to be a better trend or pattern.
2.1 RESULTS FOR THE TREND LINE EQUATIONS.
(2.1 a) Linear model.
The linear equation (see fig.2.1a) is given as Yt = -99981.86+142.440t. With a MAPE of 885, a MAD of
6243 and MSD of 71991198.

www.theijes.com

The IJES

Page 5

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
Figure (2.1a)

(2.1 b) Quadratic model.

The quadratic equation (see fig. 2.1b) is given as Y t =5410.78-176.236t+1.10268t2.with a MAPE value of 344,
a MAD value of 3772 and MSD value of 25521225.
Figure

(2.1b)
(2.1 c) Exponential model
The exponential equation (see fig.2.1c) is given as Yt=114.651(1.02281t) with a MAPE value of 24, a
MAD value of 2443 and MSD value of 321050434.

www.theijes.com

The IJES

Page 6

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
Figure

(2.1c)
(2.1 d) S-Curve.
The S-Curve (peal fleed logistic) model (see fig.2.1d) is given as
Yt=106/(34.3832+12762.4(0.971699t)).with a MAPE value of 24, a MAD value of 3415 and MSD value of
6120008.
Figure (2.1d)

The graphs of the trend equations are shown in figures 2.1 (a), 2.1 (b), 2.1 (c) and 2.1 (d) above
The error measures of the trend line equations are summarised in the table below:
TREND
Linear
Quadratic
Exponential
S-curve (peal fleed logistic).

MAPE
885
344
24
24

MAD
6243
3772
2443
3415

MSD
71991198
25521225
32150434
61200108

Table 1.1

www.theijes.com

The IJES

Page 7

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
PERFORMANCE OF THE TREND LINE EQUATIONS
As discussed earlier, an equation with minimum MAPE and MAD is considered to be a better trend or
pattern. Among the models stated above, it could be seen that exponential model satisfies that condition and
therefore could be selected as an appropriate trend or pattern for Nigeria Stock Exchange (shares).
ADF Test Statistic

-4.297321

1% Critical Value*
5% Critical Value
10% Critical Value

-3.4552
-2.8719
-2.5723

*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(SPR,2)
Method: Least Squares
Sample(adjusted): 1985:07 2008:12
Included observations: 282 after adjusting endpoints
Variable

Coefficient

Std. Error

t-Statistic

Prob.

D(SPR(-1))
D(SPR(-1),2)
D(SPR(-2),2)
D(SPR(-3),2)
D(SPR(-4),2)
C

-0.471422
-0.341030
-0.209103
0.028770
-0.054867
38.80649

0.109701
0.111876
0.112643
0.097721
0.070278
80.64386

-4.297321
-3.048276
-1.856335
0.294407
-0.780721
0.481208

0.0000
0.0025
0.0645
0.7687
0.4356
0.6307

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.428587
0.418235
1316.354
4.78E+08
-2422.607
1.997573

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

-5.584291
1725.834
17.22417
17.30165
41.40263
0.000000

Table 1.2

Figure. 2.2 plot of time series (Shares, 1985- 2008 )

Model 1: ARMA, using observations 1985:01-2008:12 (T = 288)
Dependent variable: shares
Standard errors based on Hessian

www.theijes.com

The IJES

Page 8

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
Coefficient
13341.2
0.994188
0.202119

Const
phi_1
theta_1
Mean dependent var
Mean of innovations
Log-likelihood
Schwarz criterion

Std. Error
11252.2
0.00516065
0.0544073

10590.70
30.33702
-2488.776
5000.203
Real

Z
1.1857
192.6479
3.7149

p-value
0.23576
<0.00001
0.00020

S.D. dependent var

S.D. of innovations
Akaike criterion
Hannan-Quinn

Imaginary

Modulus

***
***
14593.40
1358.582
4985.551
4991.423

Frequency

AR
Root 1

1.0058

0.0000

1.0058

0.0000

Root 1

-4.9476

0.0000

4.9476

0.5000

MA

a
Residual ACF
0.2

+- 1.96/T^0.5

0.15
0.1
0.05
0
-0.05
-0.1
-0.15
-0.2
0

10

15

20

25

lag

Residual PACF
0.2

+- 1.96/T^0.5

0.15
0.1
0.05
0
-0.05
-0.1
-0.15
-0.2
0

10

15

20

25

lag

fig.2.2 ACF AND PACF (Before differencing)

Root 2
1.4960
0.0000
1.4960
0.0000
Model 2: ARIMA, using observations 1985:02-2008:12 (T = 287)
Dependent variable: (1-L) shares
Standard errors based on Hessian
Coefficient
Std. Error
Z
p-value
Const
73.5225
179.985
0.4085
0.68291
phi_1
0.0980653
0.168414
0.5823
0.56037
phi_2
0.648896
0.133664
4.8547
<0.00001
***
theta_1
0.136203
0.164541
0.8278
0.40780
theta_2
-0.537849
0.107461
-5.0051
<0.00001
***

www.theijes.com

The IJES

Page 9

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis

Mean dependent var

Mean of innovations
Log-likelihood
Schwarz criterion

109.1969
-6.145163
-2467.638
4969.234
Real

S.D. dependent var

S.D. of innovations
Akaike criterion
Hannan-Quinn

Imaginary

Modulus

1392.149
1311.197
4947.277
4956.077
Frequency

AR
Root 1
Root 2

-1.3193
1.1681

0.0000
0.0000

Root 1
Root 2
Table 2.2

-1.2428
1.4960

0.0000
0.0000

1.3193
1.1681

0.5000
0.0000

MA
1.2428
1.4960

0.5000
0.0000

ACF
Residual ACF
+- 1.96/T^0.5

0.15
0.1
0.05
0
-0.05
-0.1
-0.15
0

10

15

20

25

lag

Residual PACF
+- 1.96/T^0.5

0.15
0.1
0.05
0
-0.05
-0.1
-0.15
0

10

15

20

25

lag

Fig. 2.3 ACF AND PACF (after differencing) ARIMA (2 , 1,2)

III.

RESULTS FOR ARIMA MODELS.

As discussed earlier in section 3.3.1 for ARIMA, model identification was performed first followed by
model estimation. Lets see the model identification step first.
3.1 Results for ARIMA Model identification.
The model identification was performed using Autocorrelation Function (ACF) and Partial
Autocorrelation function (PACF) plots (see appendix A for the details) Figure 2.2 shows the ACF and PACF for
Nigeria Stock Exchange (shares) with d=0. The two lines parallel to X-axis show 95% confidence interval.
Anything inside these lines can be treated as zero. In the figure, ACF plot doesnt decay rapidly, which means
that the series is non- stationary, hence needs differencing (according to rule 2 in appendixes A).

www.theijes.com

The IJES

Page 10

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis
Figure 2.3 shows ACF and PACF plots for Nigeria Stock Exchange (shares). From ACF plot it is clear
that there is no need of further differencing (according to rule 1 in appendix A). Here ACF and PACF both plots
are mixtures of exponentials and damp sine waves, which start after the first lag. Hence according to rule 5 in
appendix A, the model identified is ARIMA (2, 1 2). Also these plots resemble the pattern from region 4 in
figure A.3 which ensures ARIMA (2, 1, 2) model. Also out of all the models that were tried, it was observed
that ARIMA (2, 1, 2) model gave minimum MAPE (L), minimum MAE (L), (see table 2.2 above).
Though, there is no need for further differencing, one more differencing was performed as the models
with d=2 were also tested for forecasting in the next step of the experiment. Figures 2.3 show ACF and PACF
plots for that. From the figures, PACF decays as good as exponentially, while ACF is nonzero till the second
lag. Hence according to rule 4 in appendix A. ARIMA (0, 2,2.) may also be fit for this series.
TABLE 3.1 DIFFERENT PERFORMANCES OF ARIMA MODELS
P
1
1
1
2
2
2
1
0
1
0
0
1
2
2
2
0
1
2
2
1
0
2
1
0
0
0
0

D
1
0
1
0
0
1
0
1
0
1
1
1
1
0
1
2
2
2
2
2
2
2
2
2
0
0
0

Q
1
1
0
1
0
0
0
2
2
0
1
2
1
2
2
0
0
0
2
2
2
1
1
1
2
1
0

MAPE
11.501
54.116
15.053
46.979
51.026
13.515
50.542
16.959
52.018
22.486
18.904
11.983
12.109
55.170
10.500
8.931
7.965
11.019
11.622
9.509
11.014
11.341
10.990
10.881
488.732
851.342.
1572.863

MAE
531.342
592.110
543.121
581.849
580.637
536.155
608.584
557.028
581.807
605.063
559.879
543.333
540.740
601.811
529.615
605.103
601.725
592.228
576.596
548.510
563.556
573.065
562.487
556.222
3231.897
5660.993
10707.946

R.SQUARD
992
989
991
991
989
992
988
992
989
991
991
992
992
989
992
992
990
991
992
992
992
395
992
992
894
717
000

S.R.SQUARED
109
989
062
991
989
089
988
059
989
008
049
113
112
989
112
001
237
368
404
394
392
395
392
392
894
717
000

Conclusion and Recommendations

From the experiments performed in this study, the following conclusions can be drawn.
1.
Model identification indicated that ARIMA (2, 1, 2) is the best fit of this index. This was supported by
the forecasting results of different ARIMA models as the forecasting performance of ARIMA (2, 1, 2) was
better than other ARIMA models.
2.
MA models (i.e. ARIMA with p = d = 0) and ARIMA models with d = 0 are not suitable for these
series.
3.
The experiment shows that exponential model gives the best trend line or pattern for Nigeria stock
exchange as noticed in figure (4.1 c) which gives minimum value of MAPE and MAD.
It was therefore recommended that the operators of the Nigerian stock market should relaxed the bottle necks
and stringent laws on stock practices so that more people will be attracted to take part. The operators of the
stock market should raise the level of awareness so that investors will keep abreast with new innovations and
what is happening in the market.

www.theijes.com

The IJES

Page 11

Modelling the Nigerian Stock Market (Shars) Evidence from Time Series Analysis

REFERENCES
[1].
[2].
[3].
[4].
[5].
[6].
[7].
[8].
[9].

[10].
[11].

[12].
[13].
[14].
[15].
[16].
[17].
[18].
[19].
[20].
[21].
[22].
[23].
[24].
[25].

Abhyankar, A. et al. (1997); the nature of Statistical learning Theory and Price
indices. Introduction to stock Market prices in
developing countries.
Agrawalla, R.K. and Tureja, S.K. (2007), causality between stock market development and economic growth: A case study of
india, journal of management research, 7,158169.
Alex, J. S. and Bernhard S. (2004) A tutorial on support vector regression statistics and computing. .
Alile , H. (1996),; Dismantling Barrier of foreign Capital flows. The Business Times of Nigeria 14th April, page 5.
Arestis, P., Demetriades, P.O and Luintel, K. B (2001).financial development and economic
growth: the role of stock
markets Journal of money, credit and Banking, 33, 16-41.
Arief, S.(1995).Share price determination and share price behaviour in developing
economies. The case study of Malaysia
and Singapore, Sritua, Arief Associates,
Jakarta.
Atiya, A., Talaat, N, and Shahean, S.(1997). An efficient stock market forecasting, model
using neural networks.
Neural network International conference.
Box, G.E. Jenkins, G.M. and Reinsel, G.C.(1994) Time series analysis, forecasting and control..
Brooks, R.D., Davidson, S. and Faff, R.W. (1997). An examination of the effects of major
political change on stock
market volatility, the South African experience, journal of
international financial Markets, institutions and money, vol
7(3), pp 255-275.
Central Bank of Nigerias (CBN) Statistical Bulletin (Various issues).
Chi- cheong, C. w.,Man- chung, C. and Chi- Chung, L. .(2000) Financial Time series forecasting by neural network using
conjugate gradient learning algorithm and multiple linear regression weight initialization, computing in Economics and
finance.
Darrat, A. F. (2000) On testing the Random walk Hypothesis. A model comparison
approach, financial review, vol.35 no.3
pp105.
Demirgue- Kunt, A. and Ross, L. (1996), Stock Market, corporate finance and
Economic Growth; An overview. The
world Bank Review. Pg.223-239.
Dickson, J.P. and Muragu K. (1994). Market Efficiency in developing countries. A case study
of the Nairobi stock
exchange Journal of Business Finance and Accounting, vol
21(1), pp 133- 150.
Eugene, F. (1970), Theory of Efficient Capital Markets. In graduate school of Business.
University of Chicago.
Fama, E.(1994) The behaviour of stock market prices, in graduate school of Business,
university of Chicago.
Gidofalvi , G.(2001) using News articles to predict stock price movements,. University of
California,
San Diego,
Department of computer science and Engineering.
H. Roberts, (1999). statistical versus clinical prediction of the stock market..
H.F. Zou, G.P. Xia, F.T. Yang and H.Y. Wang.(2007) An investigation and comparison of
artificial neural Network
and time series Models for Chinese food grain price
forecasting..
Habibullah, M.S. (1999), financial development and economic growth in Asian countries:
testing the financial led
growth hypothesis, savings and development, 23,279- 290.
Investopedia
A
Forbes
media
company.(2004).
Efficient
Market
Hypothesis
(EMH).
In
http//www.investopedia.com/terms/e/efficient market hypothesis.
J. Zurada.(1994) , U.S.A Introduction to Artificial Neural Systems.
Le Baron. (1999). Inefficient Market Hypothesis. Forecasting Financial Market using
past prices to determine the present
prices.
Lijuan Cao and Francis E.H.Tay (2001). financial forecasting using support vector machines.
Neural computing and
applications.
Lisa, B., Jeffery, J. and Choudary, R.H (1998) Improving forecasting for telemarketing centres by Arima modelling with
intervention. International journal of
forecasting

www.theijes.com

The IJES

Page 12